What is your organization’s approach to resolving disputes? Have you found arbitration to be unworkable? Do you scream at the representatives of the other side? Have you found sending legal notices ineffective? Do you negotiate with the other side?
How do you prevent clients from delaying payments? Are you paying penalties on delayed payments?
If you are carrying out any kind of business, there is a strong likelihood that differences between clients, customers, suppliers, collaborators, employees or even business partners will arise. Those who are already running a business, or even those who are planning to start one, must know how to handle and resolve them.
Adopting an “I will see when it happens” strategy for business disputes can be disastrous.
Disputes could arise in context of what their responsibilities are – for example, “Should the marketer take a particular action to sell your product?”, “Is the consultant required to also do ‘x’?” Payment-related disputes are extremely common these days. Some are intentional defaults (a recent story of willful default by Kingfisher can is available here).
Many startups spend inordinate amount of time and monetary resources sending bills and following up from clients. While banks and financial institutions have the benefit of special legal mechanisms and dedicated recovery agents to recover dues if there is a default, ordinary businesses don’t. Therefore, having an effective dispute resolution and money recovery strategy is extremely important for them.
What are the strategies you can use to prevent or resolve disputes quickly?
#1 – Foresee and negotiate more situations when you enter into business deals
Many disputes can be prevented in the first place by appropriately drafting business contracts to cover possible risks. This requires identifying the commercial intent of the parties involved in a transaction carefully, and contemplating different situations that might arise due to a change in circumstances in future. Consider a joint venture from a licensing agreement, or a co-founders agreement, or a service level agreement. While you will find some general negotiate pointers relevant to any business transaction (see here, for example), there will also be specific ways in which you protect your commercial objective and negotiate outcomes.
Contracts are a great way to allocate commercial risk – responsibilities of parties, consequences of violation and the claims based on which you are entering into the transaction are extremely important.
For example, if you gave a consultant design work, and you were sued by a competitor which claimed that the logo is very similar to its own, who would bear the consequences if you were sued – would it be you or the consultant? (It should be the consultant under all circumstances).
Identifying ‘What if something I contemplate does not happen / what if an unforeseen circumstance occurs / what if a party fails to perform what it has agreed to’ or ‘when is the payment due / when exactly will I get paid and how’ are some common questions to ask to negotiate better commercial deals.
Senior businessmen and serial entrepreneurs who have significant experience in their industry will know some these issues by experience. In fact, one reason why a good consultant or lawyer is valued is because he can help parties think through this by asking such simple questions.
#2 – Have a proper recovery strategy in place for recovering bills
In India, the payment-related issues can be prevented or addressed by having a planned money recovery strategy and by obtaining appropriate registrations as the government – for example under the Micro, Small and Medium Enterprises Development Act. The act has some very powerful mechanisms to ensure that SMEs are paid on time by their customers.
Businesses that default are required to pay penal interest rates and are also required to make disclosures in their financial statements, which are both serious disincentives to delaying or defaulting on payments.
An effective strategy involves obtaining registration under the act, coupled with certain additional reinforcements – such as including suitable terms in invoices and contracts with clients. Businesses can also commence dispute resolution proceedings before a special forum (under the act), or commence arbitration (discussed below), which can expedite payment recovery.
Most entrepreneurs are unaware of this and hence are unable to benefit from this strategy (you can learn about it in more detail in this course).
#3 – Include customized arbitration clauses that are quick, cost-effective and convenient
Heard of arbitration?
It is like private dispute resolution, where the parties themselves appoint a third party to decide on the dispute. Arbitration was expected to be a relief in India where court proceedings last for decades, but due to lack of adequate customization it has only added one more step to an already prolonged setup. We’ll explain this through an example – let’s look at a typical arbitration clause, which is seen in the vast majority of commercial contracts (contracts with foreigners also frequently feature a similar clause):
In the case of any dispute arising out of this agreement, the dispute shall be finally settled by arbitration under the Arbitration and Conciliation Act, 1996. The arbitral tribunal shall comprise 3 members. The Company shall appoint one (1) arbitrator and the Investor shall appoint one (1) arbitrator. The two (2) arbitrators shall then jointly appoint a third arbitrator.
What will happen if this contract goes for arbitration? Costs will shoot out of control, time taken will not be shortened and parties are likely to get exhausted (not by doing business but by the process of arbitration).
Do you know why?
This clause suffers from multiple weaknesses, because it does not cover various situations that may arise.
For example:
1) What are the mechanisms to control timelines? In how much time must they appoint arbitrators? What timelines should be followed in filing a response, and what are the consequences if they are not followed?
2) What are the fees that the arbitrator will charge?
(In the absence of any stipulation, there are chances that the arbitrators may not be affordable, especially if the parties fail to agree on a arbitrator and approach a court to appoint one.)
3) What should be the skillsets of the arbitrator? Is there any linkage between the subject matter of the contract and the technical qualifications of the arbitrator?
(The dispute is likely to be resolved faster and more in consonance with the intentions of the parties if the arbitrator understands the subject matter. For example, an angel investor is better equipped to understand an investment exit-related dispute than a judge or lawyer who has experience in matrimonial or criminal law.)
Arbitration gives parties tremendous freedom and ability to customize dispute resolution – not to use this freedom effectively can be wasteful. It will also prevent parties from being able to derive the intended benefits from the arbitration. Institutional arbitration, such as arbitration with an industry body like a Chambers of Commerce, London Court of International Arbitration (India chapter) helps in removing some of the shortcomings of this clause (though not all), since reputed institutions operate with a certain level of professionalism to prevent procedural delays.
Whose job is it to help out with the above?
In a large company, there is a huge department headed by a ‘General Counsel’ or a ‘Vice President, Legal’, which helps in ensuring that the right money-recovery and dispute resolution strategies are in place, and that contracts are legally risk-optimized. Yet, you’ll be surprised to know how many of India’s largest companies do not have optimal dispute resolution strategies in place and enter into disadvantageous contracts. (Occasionally, in a company that has gained some traction and funding, you can also hope to gain some assistance from lawyers who advised the investor.)
What about an early stage startup? Well, it is the founders.
This is when the business idea is being crystallized – as an entrepreneur, your needs are amorphous and fast evolving and the model is not set in stone for a long time. While you can identify lawyers in your own network, time they can provide you is very limited and assistance restricted to their ‘limited’ understanding of your business (which may be different from what you really need). As your business model keeps evolving, adapting and pivoting fast, nobody is better placed than you, as the architect to direct and plan this work, even though you can delegate it to somebody else (once you know what the work is and what your desired outcomes are). One of the tools that has been found to be helpful by entrepreneurs in their business is this course.
[box type=”shadow” ]About The Author:Abhyudaya Agarwal is a founder of iPleaders, a legal education startup that works with top universities and industry bodies to launch online courses. He can be reached at [email protected][/box]
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